In response to the rising prevalence of digital transactions, the IRS has implemented a noteworthy change by lowering the reporting threshold for Form 1099-K. This 1099 form is used to report payments made through online transactions. This reduction has significantly increased the requirement to report Form 1099-K. If you are a business or an individual who utilizes online payments, there is a possibility that you may receive Form 1099-K at the end of the year.
If you’re feeling confused about the possibility of receiving a 1099-K copy this year or are unsure what you need to do with this form as far as reporting goes, keep reading for a comprehensive overview.
Definition: Form 1099-K
Form 1099-K is an IRS Tax Form used by payment settlement entities to report online payments made through payment cards and third-party network transactions during the year.
A payment settlement entity is an entity that facilitates the payments made through payment cards and third-party network transactions. Some familiar examples of payment settlement entities are PayPal, Venmo, Amazon, banks, etc.
If you receive form 1099-K from each payment settlement entity at the end of the year if you meet the following conditions:
- If you receive any payments through payment cards such as Debit cards, Credit cards, and Stored Value Cards (Gift cards).
- If you receive $600 or more through payment apps or online marketplaces. The payment includes any commercial transaction, personal items sold, renting property, or services offered through the following platforms.
- Payment apps such as PayPal, Venmo, Cash app, etc
- Online marketplace to sell or resale goods
- Auction sites
- Real estate marketplace
- Taxi and Car rental platform
- Ticket exchange and resale platform
- Crowdfunding platform
- Freelance marketplace
The threshold of $600 is only applicable to payments made through third-party networks and not to payments made through cards.
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Why Form 1099-K is Rising in Prominence
In the era of digitalization, digital transactions have become increasingly common. To address this, the IRS introduced Form 1099-K to track and report unreported digital payments. Initially, Form 1099-K required reporting for third-party transactions exceeding $20,000, with a minimum of 200 transactions in a year. However, these thresholds were relatively high, and many businesses didn’t meet them.
To maintain accurate records, the IRS has reduced the reporting threshold for third-party network transactions. However, this change has raised more questions than it has answered. Many businesses are already familiar with Form 1099-NEC and Form 1099-MISC. The lowered threshold has increased the requirement to report Form 1099-K, potentially leading to businesses receiving two different forms.
For example, if your client pays you through PayPal and they issue a 1099-NEC at the year’s end, you also receive a 1099-K from PayPal, causing double the reporting amount on your tax return.
Businesses might end up paying double the amount, leading to many reporting discrepancies.
What Should Your Business Do?
It’s important for your business to implement various measures to counteract this confusion. Before that, businesses should be aware of the difference between Form 1099-K, 1099-NEC, and 1099-MISC, as these forms are most commonly misunderstood. Once you are aware of the key differences between forms, follow these measures to avoid dual reporting confusion.
- Set up a different account for business and personal transactions.
- Ensure that you pay your business expenses through business payments through business accounts and personal payments through personal accounts.
- Label your third-party network transaction clearly on your account software so that you can keep track of your expenses and cross-verify your 1099-K in case of any errors.
- Change your business payment policy, and accept payment only through PSE or only through check or cash.
- Clearly state your clients do not provide 1099-NEC or MISC when they make payments through PSE.
Now that we’ve put in place some measures to avoid dual reporting, this brings us to our next question.
What Should You Do if You Have Already Received Form 1099-Misc and 1099-K for the Same Payments?
Well, there is a chance you might receive both forms. However, if you receive both forms, here are the steps you should follow.
– Report the 1099-K payment on your tax return
– Keep a detailed track of the record of the payment and original copy of the forms in case any discrepancies arise.
What Are Payments That Should Not Be Reported on Form 1099-K?
Payments made to friends and family as gifts or reimbursement are not taxable and are not reported in the Form 1099-K. If you receive Form 1099-K for personal transactions, contact the issuer immediately and request a corrected form. If you cannot obtain a corrected Form 1099-K, follow these steps:
On Schedule 1 (Form 1040):
- Enter the error on Part I – Line 8z – Other income: “Form 1099-K received in error,”
- Adjust it on Part II – Line 24z – Other adjustments: “Form 1099-K received in error,”
As mentioned earlier, you can avoid personal transaction reporting by maintaining a separate account for both business and personal transactions.
Bottom Line
In today’s digital-centric era, grasping and accurately filing 1099-K is crucial for both businesses and individuals. By following the outlined steps and staying informed about tax reporting intricacies, you can confidently navigate the complexities of Form 1099-K, ensuring your financial well-being through precise and compliant tax filings.
